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Do Chinese internet users need another Facebook? Probably not: An analysis of the regulatory and market conditions for the Chinese internet

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2016 Annenberg-Oxford Media Policy Summer Institute participant and PhD student at York University and researcher for Canadian Media Concentration Research Project, Lianrui Jia, is researching Post-WTO Internet policies in China – in particular, how the country is supporting and regulating its telecommunication and Internet industry. In an interview with 2016 CGCS visiting scholar Till Waescher she discusses the growing importance of China’s online companies both domestically and internationally, their ambivalent relationship with the Communist Party, and the prospects of U.S. internet companies’ re-entry into the Chinese market.

Your research focuses on media concentration in general and the political economy of Chinese internet companies in particular. Describe the rise of Tencent, Alibaba, and Baidu in the last five years in terms of revenue, traffic and user numbers. How do these companies fare in comparison with their U.S. counterparts?

Baidu, Alibaba, and Tencent (BAT) are now the biggest three Chinese Internet companies. Due to vertical and horizontal integration these three have become behemoths in their respective areas (Baidu in search, Alibaba in e-commerce, and Tencent in social media and gaming). All three are public companies listed on NASDAQ, and they have generated some pretty staggering numbers. Revenue wise, BAT have achieved, on average, nearly three folds of revenue growth from 2011 to 2015, with Baidu’s revenue growing from 2,303 million to 10,247.6 million (357.8% increase), Alibaba from 3181.9 million to 12,293 million (280.5% increase), and Tencent from 4528 million to 102,863 million RMB (261% increase). Alibaba’s IPO was the world’s biggest at the time it went public in September 2014, valuing at 25 billion. On September 5th, 2016, Tencent became the most valuable company in Asia with a market capitalization of 255 billion, surpassing Alibaba’s 250 billion. Compared to their U.S counterparts Google, Amazon, and Facebook, BAT’s market capitalization is substantially smaller, although they have been slowly catching up amidst the fluctuations.

In terms of users, Tencent’s online chat service QQ and mobile messaging app WeChat had 853.1 and 697 million monthly active users (MAU) in 2015, respectively. For these two products combined, there was a roughly 500 million MAUs increase in the last three years. In 2015, Baidu occupied 85.7% of the search engine market with 657 million monthly active users. Alibaba had 350 million customers in 2015, up from 231 million in 2012. This substantial growth is underpinned by the growth in Internet population in China. In 2011, there were 513 million users online; in 2015, there were 688 million. In particular, the number of mobile internet users has grown exponentially: in 2011, only 69.3% were mobile users but in 2015, 90.1% of internet users were mobile users as well.

However, the most notable difference between these Chinese companies and their U.S. counterparts is that Chinese companies derive almost all of their revenue from the domestic market. In other words, Chinese internet companies are not as global as the U.S ones, in terms of revenue distribution, users, or product reach. For example, Google, in 2015, generated 54% of its revenue internationally, and nearly half of Facebook’s revenue (49.9%) comes from markets outside the U.S.

To increase revenue, Chinese companies have begun to expand globally. As CGCS Internet Policy Observatory affiliate Sarah Logan pointed out in a Chinese companies’ investments outside China have faced scrutiny from the public and regulators due to the companies’ close ties to the Communist Party. Do you think public companies such as Baidu and Tencent, whose executives have to answer to international shareholders, can and will change or rethink the nature of their relationship with the Chinese government in order to further grow internationally?

Sarah Logan’s piece is an excellent study into the conundrum that Chinese Internet companies have to face in the course of global expansion: the process is always embedded in and influenced by geopolitics. I do not think companies like Baidu and Tencent will change or rethink their relationship with the Chinese government, at least not in a drastic way. First of all, the home market is too important. Over 90 percent of revenue for Baidu and Tencent comes from mainland China. In their annual report in 2015, Alibaba did not report any international revenue because it was too insignificant. Their dominance in the domestic market hinges upon their experience in dealing with the government for well over a decade, and they will not risk or break it for the sole purpose of gaining a larger foothold in overseas market.

Secondly, for these companies, maintaining a good relationship with the Chinese government and expanding in foreign markets is not necessarily an “either or” decision as many perceived. We have seen cases like Baidu, where the launch of its services and products in Brazil during President Xi’s state visit to Brazil were under the auspices of the government. The launch of Baidu’s Portuguese search engine, Busca, its contract with the Brazilian government to build R&D facilitates were not only a global push for the company itself but were also harnessed by the state to facilitate bilateral trade relations and further diplomatic ties. Culturally speaking, the Chinese government also benefits from these companies being global players as a manifestation of China’s soft power. From an economic perspective, these high-tech companies can help upgrade the country’s export structure and help

However, I think there are signs of an intricate “love-hate” relationship between these companies and the Chinese government. The relationship can be mutually beneficial at times especially when the companies help modernize and reform struggling state-owned enterprises in accordance with the state’s “internet plus” plan. Other times, their association with the Chinese government (and domestic internet control mechanisms) has a detrimental spillover effect on their overseas expansion and growth, as Logan’s piece demonstrates.

Baidu, however, according to various press reports, has to increasingly deal with criticism from within China. In May, regulators said they would investigate the company’s business practices and their sponsored search results. Explain the differences when it comes to regulating internet companies in China, most of which are public, and the mostly state-owned TV industry (e.g. CCTV, Shanghai Media Group).

There is a phrase to sum up the regulatory processes in Chinese: “nine dragons bring no water”, with a media regulatory structure characterized by many overlapping institutions that oversee the Internet. Internet companies in China are subject to ownership rules, content regulation, licensing rules, intermediary liability, industry self-regulation, and various rules formalized at the provincial level (such as real name registration rules). Some key regulators are: Ministry of Industry and Information, State Council, Ministry of Public Security, and State Administration of Industry and Commerce.

For the state-owned TV industry, given that the owners are largely state actors, the most substantial set of rules deals with content. The State Administration of Press, Publication, Radio, Film and Television of the People’s Republic of China (SARFT) is the key regulator, and the Regulations on Broadcasting and Television Administration promulgated by the State Council is the main piece of regulation. The Regulation basically rules out any non-state actor from owning and operating stations in China and lists the licensing rules and screening measures for foreign media contents.

When Google left China it cited reasons of censorship and surveillance by the Chinese state. Baidu and Tencent have been repeatedly criticized for taking part in the “Great Firewall” project and surveilling their users. Yet the Snowden leaks revealed that U.S. companies as part of the PRISM program – willingly or unwillingly – have provided the NSA with personal data of their users as well. What is your assessment of the way Chinese companies deal with their users’ privacy as opposed to U.S. firms?

Privacy has different social and cultural connotations in the context of Chinese social media. It is, though, largely an uncharted realm in the national public and policymaking consciousness. There have been attempts to protect user privacy and data security, but these efforts do not form a systematic and well-enforced legal regime. The regulatory authorities dealing with privacy protection are dispersed in the hands of several government agencies, composed of instruments in the Criminal and Civil law, in regulations formalized by the Standing Committee of National People’s Congress and by the Ministry of Industry and Information technology.

Moreover, the government’s attempts to regulate online behavior and content are at odds with the protection of user privacy, especially the set of real name registration policies on the country’s various online services. The companies are also subject to immense pressure to disclose user information when government demands them to do so. Even foreign companies operating in China are largely unable to uphold and protect user privacy at the behest of government orders. For example, Yahoo! handed over personal information and email communication of its user Shi Tao to the government, which resulted in his arrest and detention in 2005.

In China, regulation on privacy lags well behind many other countries and international standards, especially given the growing popularity of mobile internet apps and services that increasingly constitute daily life for many Chinese (like ride hailing, online payment, and online chat) and corresponding privacy issues. What is particularly troubling, however, is the oligopolistic market structure of the Chinese internet: only a handful of companies own various popular products and services due to the vertically and horizontally integrated corporate structure. BAT in particular, own huge amounts of user information across different platforms. For example, Alibaba, who owns Taobao, the e-commerce website that obtains a well of information about its users through each transaction, also owns Alipay, the online payment system, and series of financial products.

Privacy protection is becoming an increasingly important issue on the Chinese internet that must be addressed– a carnivalesque space where users interact, communicate, “have fun and make money”, and at the same time, leave much information, data, and metadata. The Chinese government needs to catch up on establishing a systematic and solid legal regime to protect internet users. The burden also falls on average users to raise awareness over the importance of privacy and information security.

Facebook’s CEO Mark Zuckerberg, who is fluent in Chinese and has a Chinese wife, has made several trips to China to meet officials. For example, last March he had a meeting with Chinas propaganda minister Liu Yunshan. Do you think regulators will allow Facebook to reopen business in China in the long run? If so, would it make sense business-wise or is the market share of Tencent, Baidu, and Sina too big already?

If Facebook enters China, my speculation is that it won’t be the launch of a Chinese version of Facebook, but other types of services or products. Renren, which is a social media network once comparable to the design and function of Facebook, has had continuing decreasing revenues since 2013, from US $64.1 million to $41.1 million in 2015. Putting aside the obligation that Facebook has to abide local rules and regulations, current competition and market saturation is also a concern for Facebook’s entrance to the Chinese market. The rise of Weibo and WeChat has largely dominated the social media market and people are more customized to WeChat not only for its powerful, all-integrated functions but also because of the circles of friends, acquaintances, and connections cultivated on this application. As we know, network effect is key to the growth of social media network and WeChat is gaining that momentum among Chinese users now. Do Chinese internet users need another Facebook? Probably not.